Start networking and exchanging professional insights

Register now or log in to join your professional community.

Follow

How Internal Rate of Return (IRR) and Net Present Value (NPV) are related to each other? Which of this two criteria is more reliable and when?

user-image
Question added by Bekhruz Nurnazarov , Property Consultant , AZIZI DEVELOPMENTS
Date Posted: 2016/06/10
Nadeem Ahmed
by Nadeem Ahmed , Senior Accountant , Mouawad MENA DMCC

NPV & IRR are related by an equation. IRR is the rate at which NPV is 0.

When you have two mutually exclusive project (where acceptance of one project means rejection of other project) and both NPV and IRR give conflicting results, we should use NPV method to determine which project add more value to the business.

Hence NPV is more reliable when you have mutually exclusive projects and both the methods give conflicting results.

In case of Independent projects, any method can be used. Criteria for NPV method is -

Accept if NPV > 0 , Reject if NPV <= 0

Criteria for IRR method is -

Accept if IRR > Cost of Capital, Reject if IRR <= Cost of Capital

Rodelio Oandasan
by Rodelio Oandasan , Accountant , Master and Tailor

 

IRR and NPV  are both methods primarily use in forecasting capital budgeting. 

More Questions Like This